Small Price Responses to Large Demand Shocks

45 Pages Posted: 7 Mar 2014

See all articles by Etienne Gagnon

Etienne Gagnon

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Date Written: February 11, 2014

Abstract

We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and even though stores adjust prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.

Keywords: Demand shocks, inflation, sales, labor conflicts, mass population displacement, severe weather events

JEL Classification: E30, L11

Suggested Citation

Gagnon, Etienne and Lopez-Salido, David, Small Price Responses to Large Demand Shocks (February 11, 2014). FEDS Working Paper No. 2014-18. Available at SSRN: https://ssrn.com/abstract=2405101 or http://dx.doi.org/10.2139/ssrn.2405101

Etienne Gagnon (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523522 (Phone)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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